Real Estate Final, Chapter 5, Chapter 6, Chapter 7, Chapter 19, Chapter 21, Chapter 22, Chapter 17, Chapter 18, RE 350 - Chapter 1, RE 350 - Chapter 4, RE 350 - Chapter 9

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Capital Markets

"The financial world". Serve to allocate financial resources among households and firms requiring funds. Participants in the capital markets invest in stocks, bonds, mutual funds, private business enterprises, mortgage contracts, real estate, and other opportunities with the expectation of receiving a financial return on their investment.

User Markets

"The real world". Characterized by competition among users for physical locations and space. The primary participants in user market are the potential occupants, both owner occupants and tenants, or renters.

As of 2011, nearly 88% of private commercial real estate equity was owned by "noninstitutional investors." Which of the following investor categories represents the most common form of noninstitutional ownership?

"local" syndications and private equity funds

Given the following information, calculate the estimated terminal value of the property at the end of its holding period. Going-out cap rate: 9%, Estimated holding period: 5 years, NOI for year 5: $100,500, NOI for year 6: $102,000.

$1,133,333

Given the following information, determine the value of having an additional bathroom. Assume that the comparable properties are similar in all other attributes besides those listed in the table below.

$10,000

Suppose that an appraiser has come to the following conclusions in evaluating the subject property. Due to the dramatic shift in the perceived safety of the neighborhood, values of any residential properties in the area of the subject property have fallen by $10,000, on average. Due to the subject property's age, physical deterioration to the building accounts for an estimate of $50,000 in lost value. An evaluation of the floor plan reveals that it is quite obsolete relative to current homebuyer preferences. This has a detrimental effect on the value of the property that is estimated to be approximately $15,000. Based on your understanding of adjustments related to accrued depreciation, which of the following pertains to the adjustment for external obsolescence?

$10,000

A comparable property sold 15 months ago for $105,000. If the appropriate adjustment for market conditions is 0.25% per month (without compounding), what would be the adjusted price of the comparable property?

$108,937.50

Assume a retail tenant is paying a base rent of $120,000 per year (or $10,000 per month). In addition, the tenant must pay 7 percent of gross store sales in excess of $143,000 per month as percentage rent. If the store produces $170,000 in gross sales in a month, what is the total rent due for the month?

$11,890

Given the following information, calculate the cash down payment required to purchase the specific property. Purchase Price: $500,000, Loan Amount: 80% of purchase price, Up-front financing costs: 2.5% of loan amount.

$110,000

Given the following information, calculate the total amount of annual operating expenses for this income-producing property. Lawn care: $10,000, Property taxes: $24,000, Maintenance: $35,000, Janitorial: $25,000, Security: $32,000, Debt service: $145,000.

$126,000

Given the following information, calculate the leasing agent's commission in dollar terms. Lease Term: 10 years, Monthly Rent: $5,000, Commission: 3%.

$18,000

Suppose the operating agreement of an LLC insists that all investors receive their pro rata share of all cash flows when a property is liquidated from the portfolio. If all 15 investors contributed an equal amount of equity in establishing the LLC, each investor should receive how much from the liquidation of a property valued at $3,500,000.

$233,333

Given the following information regarding an income producing property, determine the NPV using levered cash flows in your analysis. Required equity investment: $270,000; Expected NOI for each of the next five years: $150,000; Debt Service for each of the next five years: $125,000; Expected Holding Period: 5 years; Required yield on levered cash flows: 15%; Expected Sale Price at end of Year 5: $2,000,000; Expected Cost of Sale: $125,000; Expected Mortgage Balance at time of sale: $1,500,000.

$245.15

Given the following information, determine the value of having an additional bedroom. Assume that the comparable properties are similar in all other attributes besides those listed in the table below.

$25,000

A new faculty member at the local university pays $1500 per month to rent an apartment in the downtown area. She teaches on campus 3 days a week and works from home the remaining 2 days. On the days in which she must commute, given the heavy traffic congestion, it takes her 2 hours to commute from downtown to campus. According to the assumptions of the bid-rent model, what should this professor be willing to pay in rent per month to live near campus if her hourly wage rate is $25? (In your calculations, assume there are 4 weeks in a given month)

$2700

Let's assume that we are about to appraise a house using the cost approach. The home was originally constructed in the early 1900s and is one of the last of its kind in this area. The cost of constructing an exact replica of this residence is estimated to be $350,000. On our trip to the actual property, we notice that this is the only residential unit located on this particular road. Based on the current usage of adjacent real estate, we estimate that the property would be worth an additional $25,000 in its highest and best use. However, due to the dramatic shift in the perceived safety of the neighborhood, values of any remaining residential properties in the area have fallen by $20,000. Due to the home's age, we also notice that there has been a significant amount of physical deterioration to the building, amounting to an estimate of $50,000 in lost value. Since the home was built over 100 years ago, the floor plan is quite obsolete relative to current preferences. This has a detrimental effect on the value of the property that is estimated to be approximately $15,000. Given this information, determine the appraised value of the home using the cost approach.

$290,000

Given the following information, calculate the before-tax equity reversion (BTER). NOI: $89,100, Annual Debt Service: $58,444, Net Sale Proceeds: $974,700, Remaining Mortgage Balance: $631,026.

$343,674

Given the following information, calculate the after tax-cash flow for this property. Debt Service: $45,000; First-year NOI: $91,750; Tax liability: 25% of Before Tax Cash Flow.

$35,062.50

Suppose that an appraiser has just completed her analysis using the cost approach to valuation. She has determined that the market value of the subject property is $400,000. If the added value of the site was $80,000 and accrued depreciation amounted to $50,000, what was the reproduction cost of the building?

$370,000

Assume you have been hired to appraise a local hospital. Your best estimate of the reproduction (or replacement) cost of the building is $3,700,000. However, upon evaluating the use of land in the local area, you have deemed the value of the site to be worth an additional $800,000. If the building has depreciated by $500,000 over its lifetime and there are no further depreciation losses due to external or functional obsolescence, what is the indicated value of the hospital using the cost approach?

$4,000,000

Given the following information, calculate the funds from operation (FFO). Net income: $1,200,000, Gain/losses from infrequent and unusual events: $0, Amortization of tenant improvements: $120,000, Amortization of leasing expenses: $75,000, Depreciation (real property): $2,675,000.

$4,070,000

Given the following information regarding an income producing property, determine the after tax net present value (NPV). Expected Holding Period: 5 years; 1st year Expected BTCF: $30,656; 2nd year Expected BTCF: $33,329; 3rd year Expected BTCF: $36,082; 4th year Expected BTCF: $38,918; 5th year Expected BTCF: $41,839; 1st year Expected Tax Liability: $7,645; 2nd year Expected Tax Liability: $8,658; 3rd year Expected Tax Liability: $9,708; 4th year Expected Tax Liability: $10,798; 5th year Expected Tax Liability: $6,951; Estimated Before Tax Equity Reversion at end of year 5: $343,674; Expected Taxes Due on Sale at end of year 5: $32,032; Required equity investment: $241,163; After Tax Opportunity Cost: 11.2%.

$40,858

If the lender has agreed to offer you a loan with a loan-to-value ratio of 85%, what is the size of the loan if the purchase price of the home is $500,000?

$425,000

Suppose you plan to put a 20% down payment on a house and obtain a mortgage loan that is less than the size limit on conforming loans ($417,000) to finance the remainder of the purchase. Based on your understanding of the loan-to-value ratio, what is the maximum price that you could pay for a home with these restrictions in mind?

$521,250

An individual works downtown and pays $600 per month in rent for an apartment located 10 miles from her office. She has calculated that she spends 30 minutes per day driving each way to the office and it costs her $4 per day in gas and lost productivity. Using the framework of the bid-rent model, how much would she be willing to pay for an apartment downtown, assuming a 20 workday month?

$680

Given the following information, calculate the effective monthly rent payment. Lease Term: 10 years, Concession: 1 year free rent to be spread over the term of the lease, Rental Space: 5000 square feet, Rental Rate: $20 per square foot per year, Landlord's discount rate: 10%.

$7,081

The property manager works under a management agreement between the property owner and the property management firm. As compensation for his duties, the property manager will negotiate a management fee. Given the following information, calculate the dollar compensation to the property manager in year 1. Potential Gross Income of the property: $250,000; Vacancy and Collection Losses: 15%; Miscellaneous Income: $50,000; Management Fee: 3%.

$7,875

Given the following information, calculate the NPV for this property. Initial cash outflow: $200,000, Discount rate: 15%, CF for year 1: $25,876, CF for year 2: $23,998, CF for year 3: $23,013, CF for year 4: $22,105, CF for year 5: $144,670.

-%59,657

In using transaction data to determine the current value of the subject property, it is important to recognize that general market conditions may have changed since a particular transaction occurred. Property A sold 18 months ago for $235,000 and Property B sold 12 months ago for $215,000. If the two properties are priced today at $239,500 and $222,300, respectively, what is the average monthly rate of increase that can be used to adjust comparable prices for changes in market conditions?

.19%

Suppose that we observe two comparable properties that have each sold twice within the past two years. Property A sold 24 months ago for $350,000 and Property B sold 18 months ago for $325,000. If the two properties were sold today at $375,000 and $340,000, respectively, estimate the change in market conditions (percentage change in price) per month, assuming we equally weight the two properties in our analysis?

.28%

Given the following information, calculate the loan-to-value ratio for this property. Loan amount: $450,000, Interest rate: 7.5%, Acquisition price: $550,000.

.82

Real Estate (used in 3 ways)

1. Its most common use is to identify the tangible assets of land and buildings. 2. It is used to denote the "bund;e" of rights associated with the ownership and use of the physical assets. 3. May be used when referring to the industry or business activities related to the acquisition, operation, and disposition of the physical assets.

Given the following information, calculate the load factor for this office property. Total usable area: 20,000 sq. ft., Tenant's prorated share of common area: 5,000 sq. ft.

1.25

Given the following information, calculate the debt coverage ratio for this investment. Potential gross income: $120,000, Vacancy rate: 9%, Net operating income: $57,900, Operating expenses: $51,300, Acquisition Price: $520,000, Debt service: $40,000.

1.45

In discounted cash flow analysis, the industry standard for pro forma cash flow projections of investment properties is typically:

10 years

Unlike the debt coverage ratio, the debt yield ratio (DYR) is not affected by the interest rate or amortization period of the loan; the DYR is simply a measure of how large the NOI is relative to the loan amount. Lenders who rely on this ratio are typically willing to accept a minimum DYR of

10%

Given the following information, calculate the price-FFO multiple for the following REIT. Funds from Operation: $4,000,000; Stock Price: $40; Shares Outstanding: 1,000,000

10.00

A client has requested advice on a potential investment opportunity involving an income producing property. She would like you to determine the internal rate of return of the investment opportunity based on the following information. Expected Holding Period: 5 years; End of first year NOI estimate: $113,900; NOI estimates in subsequent years will grow by 5% per year; Price at which the property is expected to be sold at the end of year 5: $1,615,205.22; Current market price of the property: $1,475,667.71.

10.00%

Given the following information, calculate the effective gross income multiplier for the specific investment. Effective gross income: $49,500, First-year NOI: $18,750, Acquisition price: $520,000, Equity Investment: 20%.

10.5

Given the following information, calculate the equity dividend rate for this investment. First-year NOI: $18,750, Before-tax cash flow: $11,440, Acquisition price: $520,000, Equity Investment: 20%.

11.0%

Suppose you purchased an income producing property for $95,000 five years ago. In Year 1, you were able to negotiate a lease that paid $10,000 per year at the end of each year. If you are able to sell the property at the end of year 5 for $100,000 (after receiving our final lease payment), what was the internal rate of return (IRR) on this investment?

11.37%

Given the following information, calculate the going-out cap rate. Estimated holding period: 5 years, NOI for year 1: $120,000, NOI for year 5: $150,000, NOI for year 6: $155,250, Expected sale price at end of year 5: $1,350,000.

11.5%

Given the following information regarding an income producing property, determine the unlevered internal rate of return (IRR). Expected Holding Period: 5 years; 1st year Expected NOI: $89,100; 2nd year Expected NOI: $91,773; 3rd year Expected NOI: $94,526; 4th year Expected NOI: $97,362; 5th year Expected NOI: $100,283; Debt Service in each of the next five years: $58,444; Current Market Value: $885,000; Required equity investment: $221,250; Net Sale Proceeds of Property at end of year 5: $974,700; Remaining Mortgage Balance at end of year 5: $631,026.

12.2%

Given the following information, calculate the debt yield ratio on the following commercial property. Estimated Net Operating Income in the first year: $250,000, Loan amount: $2,047,500, Purchase price: $2,730,000

12.2%

Given the following information, calculate the going-in capitalization rate for the specific property. First-year NOI: $18,750, Acquisition price: $150,000, Equity Investment: 20

12.5%

Suppose a developer is interested in building a new apartment community. Through her market research, the developer has determined that the target market segment potential in year 1 consists of 100 households. The developer believes that the target market segment potential will grow by 5% annually over the next five years. If the developer projects a capture rate of 25% for each of the next five years, how many units does she plan on selling by the end of year 5?

138 Units

Suppose a developer is interested in building a new residential subdivision. Through his market research, the developer has determined that the target market segment potential in year 1 consists of 160 households. If the developer projects that he will be able to sell 24 homes in the first year, what is his assumed capture rate?

15%

Given the following information regarding an income producing property, determine the after tax internal rate of return (IRR). Expected Holding Period: 5 years; 1st year Expected BTCF: $30,656; 2nd year Expected BTCF: $33,329; 3rd year Expected BTCF: $36,082; 4th year Expected BTCF: $38,918; 5th year Expected BTCF: $41,839; 1st year Expected Tax Liability: $7,645; 2nd year Expected Tax Liability: $8,658; 3rd year Expected Tax Liability: $9,708; 4th year Expected Tax Liability: $10,798; 5th year Expected Tax Liability: $6,951; Estimated Before Tax Equity Reversion at end of year 5: $343,674; Expected Taxes Due on Sale at end of year 5: $32,032; Required equity investment: $241,163.

15.4%

Using the following information, determine the location quotient for Motor City. Employment in Motor Vehicle Manufacturing within Motor City: 12,643; Total Employment in Motor City: 560,379; Employment in Motor Vehicle Manufacturing (nationally): 152,750; Total Employment (nationally): 106,201,232

15.7

A developer of a new planned unit development (PUD) has gathered the following market information for University City. The developer estimates that there will be 1,500 home (all types) sales in University City over the next year. If an analysis of demographic information has revealed that the core market share for the PUD project within the community is 14.0%, what is the total market segment potential for this project?

210 Units

Given the following information regarding an income producing property, determine the internal rate of return (IRR) using levered cash flows. Expected Holding Period: 5 years; 1st year Expected NOI: $89,100; 2nd year Expected NOI: $91,773; 3rd year Expected NOI: $94,526; 4th year Expected NOI: $97,362; 5th year Expected NOI: $100,283; Debt Service in each of the next five years: $58,444; Current Market Value: $885,000; Required equity investment: $221,250; Net Sale Proceeds of Property at end of year 5: $974,700; Remaining Mortgage Balance at end of year 5: $631,026.

22.9%

A developer of a new townhome community has gathered the following market information for University City. The developer estimates that there will be 1,200 home (all types) sales in University City over the next year. An analysis of demographic information has revealed that the core market share for the townhome project within the community is 10%. Assuming a capture rate of 20%, what is the developer's first year projection of townhome sales in the new community?

24 Units

Suppose a developer is interested in building a new townhome community. Through his market research, the developer has determined that the target market makes up 10% (core market share) of the households that currently reside in the metropolitan area. If an analysis of data from the MLS indicates that there should be approximately 500 residential sales in this area over the next year, what is the projected number of units the developer could expect to sell in year 1 if he is able to capture 50% of the market potential?

25 Units

In evaluating potential tenants for residential rental properties, a landlord may be interested in calculating the ratio of prospective rent to income for the applicant. Given the following information, calculate the rent to income ratio for the applicant. Applicant's Gross Annual Salary (Income): $45,000; Prospective Monthly Rent: $1,000; Applicant's Annual Income Tax and Benefit Payments: $7,650.

26,67%

Leases are considered the engines that drive property values. Therefore, it should not be surprising that owners of commercial property may seek an independent leasing broker to focus on finding tenants to lease space. In exchange for their services, leasing brokers are paid a commission based on what percentage of the face amount of the lease?

3 to 5%

Using the following information, determine the location quotient for this industry. Percentage of employment in financial services industry within the local community: 15%, Percentage of employment in financial services industry for the entire U.S.: 4.4%.

3.4

For residential properties, the ratio of prospective rent to gross monthly income is a valuable screening tool in judging a potential tenant's ability to fulfill rent obligations. Generally, this ratio should not exceed:

30%

The measure of cash flow most relevant to investors in income-producing real estate is the after-tax cash flow (ATCF) from property operations. Therefore, it is important to know that the maximum federal income tax rate on individuals as of 2012 is:

35%

Congressional legislation has repeatedly altered the period of time over which rental real estate may be depreciated. currently, non-residential income producing property (e.g. offices) may be depreciated over no less than

39 years

Given the following information, calculate the operating expense ratio for this property. Potential gross income: $120,000, Vacancy rate: 9%, Net operating income: $57,900, Operating expenses: $51,300.

47%

Suppose that you have begun to gather some demographic data in order to project the potential sales of a new development project. The developer hopes to be able to target the following household types who fall in the upper 10% of income brackets: Empty Nesters, Single Parents, and Unrelated Individuals. Utilizing the following population information, determine the core market share that the development project yearns to target with this project. Total Owner Occupant Households: 48,000; Traditional Families in the Upper 10% of Income Brackets: 25,000; Empty Nesters in the Upper 10% of Income Brackets: 5,000; Single Parents in the Upper 10% of Income Brackets: 10,000; Unrelated Individuals in the Upper 10% of Income Brackets: 8,000

47.92%

Suppose that you were interested in building a luxury apartment complex in your hometown. In your analysis of local demographics, you discover that the target market makes up only 5% (core market share) of the households that currently rent (or would be interested in renting) in this town. If market experts believe that a total of 5,000 apartment units will be rented in your entire hometown within the next year, what is the projected number of units the developer could expect to lease in year 1 if he is able to capture 20% of the market potential?

50 Units

Based on the following information, determine the location quotient for Amusement City and whether this city has a competitive advantage in the amusement industry. Employment in Amusements and Recreation in Amusement City: 54,446; Total Employment in Amusement City: 578,477; Employment in Amusements and Recreation (nationally): 1,381,377; Total Employment (nationally): 106,201,232.

7.24; Yes, the city has a competitive advantage in this industry.

Given the following information, calculate the appropriate after-tax discount rate. Tax rate on comparable risk investment: 35%, Investor's before-tax opportunity cost: 12%, Capitalization rate: 8%.

7.8%

Given the following information, calculate the net income multiplier for this property. First-year NOI: $18,750, Acquisition price: $150,000, Equity Investment: 20%.

8.0

Given the following information, calculate the capitalization rate for the following apartment complex. Number of apartments: 15; Market Rent (per month): $1,000; Vacancy and Collection Loss: 10% of potential gross income; Operating Expenses: 5% of effective gross income; Capital Expenditures: 10% of effective gross income; Acquisition Price: $1,710,000.

8.1%

The loan-to-value ratio measures the percentage of the acquisition price (or current market value) encumbered by debt. To protect their invested capital in the event that property values do fall, commercial mortgage lenders generally require that the senior mortgage not exceed approximately what percentage of the acquisition costs?

80%

Given the following information, calculate the price-FFO multiple for the following REIT. Net income: $1,200,000, Gain/losses from infrequent and unusual events: $0, Amortization of tenant improvements: $120,000, Amortization of leasing expenses: $75,000, Depreciation (real property): $2,675,000. Stock Price: $40; Market Capitalization: $40,000,000

9.83

Based on your understanding of the relation between risk and the phases of an income producing property's life, which phase would you expect to entail the highest risk? a. development and construction phase b. lease-up stage c. stable operation phase d. all three stages of a property's life have similar and equal risk

Even the smallest building project involves a multitude of separate contractors to complete construction. Therefore, it becomes difficult for the developer to monitor the construction process. Which of the following individuals serves as the developer's liaison and representative on the project site? a. Construction manager b. General contractor c. Land planner d. Subcontractor

In an analogy to the stock market, the net operating income of a property can be viewed as which of the following? a. Annual dividend expected to be produced by the property b. Annual return on the value of the property c. Price-earnings ratio of the property d. Market value of the property

In considering the main components of a construction budget, which costs would be expected to constitute the largest portion of a development project's expense? a. Hard construction costs b. Land costs c. Soft construction costs d. Marketing Costs

The effective rent calculation is a common measure used to compare the true cost of one lease to another. While there are a number of limitations to this methodology, the effective rent calculation captures: a. The time value of money b. Interlease risk c. Re-leasing costs d. The advantages associated with lease flexibility

The real estate industry applies which of the following labels to individuals who are responsible for the day-to-day operations of the property? a. Property manager b. Asset manager c. Leasing broker d. Tenant

Under certain circumstances, investors are permitted to reduce the amount of the taxable income that they report by an amount that is intended to reflect the wear and tear of an asset over time. This is commonly referred to as: a. Depreciation b. Appreciation c. Capital gains d. Capital losses

When leasing nonresidential properties, owners would prefer to rent exclusively to high quality tenants. Such owners will tend to seek out companies whose general debt obligations are rated "investment grade" by one of more of the U.S. rating agencies. These potential tenants are more commonly referred to as: a. Credit tenants b. Tenant reps c. Tenant mix d. In-house leasing agents

There are a set of restrictive conditions that REITs must satisfy on an ongoing basis in order to maintain their special tax status. All of the following statements regarding the main restrictions are true EXCEPT:

A REIT must distribute at least 75% of its taxable income to shareholders in the form of dividends

The presence of real estate cycles presents a major challenge when forecasting real estate market parameters. If the market value of a residential developer's project exceeds its construction costs, an increase in the supply of units will occur. As the market becomes oversupplied, we would expect which of the following to occur?

A decrease in real rental rates

According to the bid-rent model, which of the following individuals would be the one most likely to live closest to the central business district (CBD)? (Hint: Assume that work locations are located adjacent to each other at the center of the CBD)

A doctor at the city hospital who must walk to work

An early model of land use is the concentric ring model of urban form developed by E.W. Burgess. Of the following land uses, which would be closest to the downtown area of the central business district (CBD) according to Burgess' model?

A zone of transition containing warehousing and other industrial land uses exists between the downtown area and the residential area

3. If we desire to classify land by its use, land that does not include any improvements to the land would be categorized as:

A. "Raw" land B. Building site C. Developed land D. Property infrastructure Ans: A Difficulty: Basic Learning Objective: 2

34. Given the following information, calculate the total annual tax liability of the homeowner. Market value of property: $350,000, Assessed value of property: 40 % of the market value, Exemptions: $2,000, Millage Rate: 33.95 mills.

A. $4,685.10

17. Most real estate loans have a definite term to maturity, stated in years. The majority of home loans will typically have a term to maturity between:

A. 1-5 years B. 5-7 years C. 7-15 years D. 15-30 years Ans: D Difficulty: Basic Learning Objective: 1

3. Added to the index of the adjustable rate is a margin, which is the lender's "markup." For standard Adjustable Rate Mortgage (ARM) loans, the average industry margin has been stable at approximately:

A. 75 basis points B. 175 basis points C. 275 basis points D. 375 basis points Ans: C Difficulty: Basic Learning Objective: 1

25. Real estate markets tend to be highly segmented due to the heterogeneous nature of the products. Which of the following examples depicts this issue of market segmentation?

A. A couple searching for a single-family detached unit is willing to consider other residential property types such as an attached townhouse unit or condominium. B. A couple searching for a single-family detached unit has limited their search to homes in a single elementary school district C. A couple searching for a single-family detached unit has set a timeline for their search of 6 months, at which point they will renew their current apartment lease. D. A couple searching for a single-family detached unit has limited their search to be in a specific price range between $350,000 and $400,000. Ans: D Difficulty: Intermediate Learning Objective: 5

20. Considered a fundamental pricing metric in commercial real estate markets, the ratio of a property's annual net income to its market value is more commonly referred to as a(n):

A. Appreciation rate B. Capitalization rate C. Discount rate D. Internal rate of return Ans: B Difficulty: Basic Learning Objective: 3

15. A major problem in buildings constructed prior to the early 1970's, which of the following environmental hazards commonly associated with insulation has been the focus of costly

A. Asbestos

12. When a borrower defaults on the payment requirements of a loan, there are several options that the lender has at its disposal. When the lender allows the borrower simply to convey the property to the lender rather than pursuing a court supervised process of terminating all of the borrower's claims of ownership of the property, this is commonly referred to as:

A. Bankruptcy B. Foreclosure C. Deed in lieu of foreclosure D. Equity right of redemption Ans: C Difficulty: Basic Learning Objective: 5

15. The risk of bankruptcy tends to travel with the risk of foreclosure since both can result from financial distress. Known popularly by its section in the Federal Bankruptcy Code, which of the following types of bankruptcy is a court-supervised workout for a troubled business?

A. Chapter 1 bankruptcy B. Chapter 7 bankruptcy C. Chapter 11 bankruptcy D. Chapter 13 bankruptcy Ans: C Difficulty: Basic Learning Objective: 7

22. The ability of homeowners to prepay the principal on their outstanding mortgage balance creates cash flow uncertainty for the lender. As a result, the lender may wish to prohibit prepayment on a mortgage loan for a specified period of time after its origination. This is accomplished through which of the following?

A. Defeasance B. Yield Maintenance Provision C. Demand Clause D. Lockout Provision Ans: D Difficulty: Basic Learning Objective: 2

6. Because the mortgage conveys a complex claim for a long period of time, clauses are included in anticipation of possible future complications. Which of the following clauses requires a borrower to make monthly deposits into an account in order to pay obligations such as property taxes, community association fees, or causality insurance premiums?

A. Demand clause B. Insurance clause C. Escrow clause D. Exculpatory clause Ans: C Difficulty: Basic Learning Objective: 3

26. In an attempt to regulate home mortgage lending after the mortgage crisis of 2007, which of the following acts created an independent oversight agency tasked with the responsibility of overseeing and enforcing Federal consumer financial protection laws, enforcing anti-discrimination laws in consumer finance, restricting unfair, deceptive or abusive acts or practices, receiving consumer complaints, promoting financial education, and watching for emerging financial risks for consumers?

A. Equal Credit Opportunity Act (ECOA) B. Truth-in-Lending Act (TILA) C. Real Estate Settlement Procedures Act (RESPA) D. Dodd-Frank Wall Street Reform and Consumer Protection Act Ans: D Difficulty: Basic Learning Objective: 9

19. Congress has enacted a number of regulations that have established criteria for evaluating home loan applicants and mandating disclosures in the origination of home loans. Which of the following congressional acts requires important disclosures concerning the cost of consumer credit, including the computation of the annual percentage rate (APR)?

A. Equal Credit Opportunity Act (ECOA) B. Truth-in-Lending Act (TILA) C. Real Estate Settlement Procedures Act (RESPA) D. Home Ownership and Equity Protection Act (HOEPA) Ans: B Difficulty: Basic Learning Objective: 9

25. Even after a property goes into foreclosure, it is still possible for the borrower to reclaim the property as long as they produce the outstanding mortgage balance and all foreclosure costs incurred to that point. In a state such as Florida, this right may even extend beyond the date of the foreclosure sale. When this occurs, this right is more commonly referred to as:

A. Equity of redemption B. Statutory redemption C. Strategic default D. Substantive default Ans: B Difficulty: Intermediate Learning Objective: 6

7. Certain mortgage loans contain a due-on-sale clause, which gives the lender the right to terminate the loan at sale of the property. Which of the following types of loans is the most likely to contain a due-on-sale clause?

A. Federal Housing Administration (FHA) loan B. Veterans Affairs (VA) loan C. Conventional home loan D. An assumable home loan Ans: C Difficulty: Intermediate Learning Objective: 3

23. Real estate is defined as land and its permanent improvements. Which of the following is an example of an improvement to the land?

A. Fence B. Building C. Sewer system D. Personal property Ans: C Difficulty: Intermediate Learning Objective: 1

13. Foreclosure is considered the ultimate recourse of the lender because it allows the lender to bring about sale of the property to recover the outstanding indebtedness. All of the following statements regarding foreclosure are true EXCEPT:

A. Foreclosure is a costly process for all parties involved. B. Only those claimants who are properly notified and engaged in the foreclosure suit can lose their claims to the property. C. When a lender forecloses on a property, it extinguishes all superior liens, bringing about a free and clear sale of the property. . D. The net recovery by a lender from a foreclosed loan seldom exceeds 80 percent of the outstanding loan balance and commonly is much less than this amount. Ans: C Difficulty: Intermediate Learning Objective: 6

1. In a mortgage loan, the borrower always creates two documents: a note and a mortgage. Which of the following pieces of information is provided in the mortgage?

A. How the interest rate is to be computed. B. Whether the borrower has the right to prepay the principal during the term of the loan, and any prepayment penalties that would be incurred as a result. C. Whether the borrower is released from liability for fulfillment of the contract. D. An unambiguous description of the property that is being pledged as collateral for the loan. Ans: D Difficulty: Basic Learning Objective: 2

2. Real estate is property, which can be either a tangible or an intangible asset. Which of the following would be considered an intangible asset?

A. Land B. Building C. Mortgage D. Fence Ans: C Difficulty: Basic Learning Objective: 1

27. If a homeowner in mortgage distress owes more than the value of the home, and is unable make the loan manageable by refinancing or modifying the mortgage, the next recourse often is a short sale of the property. All of the following statements are true regarding a short sale EXCEPT:

A. Legal costs should be lower with a short sale than with foreclosure B. A short sale usually enables a better sale price and a faster sale than foreclosure C. A short sale is less damaging to the borrower's credit than a foreclosure, thereby enabling the borrower to be eligible for another mortgage loan sooner D. A short sale relieves the seller of any other outstanding obligations on the home, such as owner association fees or a second mortgage. Ans: D Difficulty: Basic Learning Objective: 5

10. Primarily through land use controls and property tax policy, which of the following branches of government has the largest influence on real estate values?

A. Local government B. State government C. National government D. Foreign government Ans: A Difficulty: Intermediate Learning Objective: 3

21. Helping to constrain entry into real estate related occupations, which of the following branches of government is directly involved in establishing rules and regulations for the licensing of professionals in the field of real estate?

A. Local government B. State government C. National government D. Foreign government Ans: B Difficulty: Basic Learning Objective: 3

24. Equity investors can choose to participate indirectly in real estate markets by purchasing shares in publicly traded real estate companies. In doing so, investors benefit from all of the following EXCEPT:

A. Low transaction costs B. Risk sharing amongst investors C. Highly segmented markets D. High information efficiency Ans: C Difficulty: Intermediate Learning Objective: 5

24. A special contract in which the borrower pledges the mortgaged property as security to the lender is commonly referred to as the:

A. Mortgage (Deed of Trust) B. Listing Contract C. Note D. Assignment of Mortgage Ans: A Difficulty: Intermediate Learning Objective: 4

18. It is possible to have a secured real estate loan without a mortgage through the use of a contract for deed. In contrast to the standard real estate sale, which of the following events occurs after the closing when dealing with a contract for deed?

A. Offer B. Acceptance C. Possession of the property passes to the buyer D. Title to the property passes to the buyer Ans: D Difficulty: Intermediate Learning Objective: 4

11. Violations of the requirements of a note that do not disrupt the payments on the loan tend to be viewed as "technical" defaults. In practice, how many days must a payment be overdue in order for lenders to treat a default as serious (i.e., a substantive default)?

A. One day B. 30 days C. 60 days D. 90 days Ans: D Difficulty: Basic Learning Objective: 5

26. Traditional zoning regulations are criticized for often being too rigid in forcing uniform types of development. One proposed solution to this issue allows traditional zoning requirements to vary in exchange for an enhancement to the community, such as the construction of a park. This is more commonly referred to as a:

A. Planned unit development

18. Especially in terms of retail properties, which of the following attributes is considered the most likely to result in drastic value differences between otherwise similar properties?

A. Structural attributes B. Financing attributes C. Location attributes D. Land attributes Ans: C Difficulty: Intermediate Learning Objective: 5

19. Capital markets can be divided into two broad categories: equity interests and debt interests. Equity investors in real estate expect to earn a return on their investment through:

A. The collection of rent and price appreciation B. The collection of interest on the borrowed funds used to purchase the property C. The receipt of property taxes D. The case of a borrower default on required mortgage payments Ans: A Difficulty: Intermediate Learning Objective: 3

14. The difference between judicial foreclosure and power of sale in the treatment of defaulted mortgages can be significant. All of the following statements regarding power of sale are true EXCEPT:

A. The power of sale treatment is faster than judicial foreclosure B. The foreclosed property is typically sold through a public auction administered by the court. C. It is less costly for power of sale to be employed than judicial foreclosure. D. Typically, lenders must give proper legal notice to the borrower, advertise the sale property, and allow a required passage of time before the sale. Ans: B Difficulty: Intermediate Learning Objective: 6

20. Special assessments are levied to pay for specific improvements that benefit a particular group of properties. All of the following characteristics of special assessments are true EXCEPT:

A. They are considered ad valorem taxes.

23. In certain states, such as the state of Georgia, there is a temporary transfer of title to the lender at the time the mortgage loan is made. The borrower then would obtain the rights to the title once the loan has been repaid. These states are referred to as:

A. Title theory states B. Lien theory states C. Conforming states D. Nonconforming states Ans: A Difficulty: Intermediate Learning Objective: 2

7. The demand for real estate derives from the need that market participants (e.g., owner occupants, tenants, renters) have for shelter and convenient access to other locations. This competition for physical location and space occurs in the:

A. User Market B. Capital Market C. Government Sector D. Property Market Ans: A Difficulty: Intermediate Learning Objective: 3

6. Real estate values derive from the interaction of three different sectors in the economy. Which of the following sectors serves to allocate financial resources among households and firms requiring funds?

A. User market B. Capital market C. Government D. Property market Ans: B Difficulty: Intermediate Learning Objective: 3

5. For most mortgage loans on commercial real estate, the right of prepayment is constrained through a prepayment penalty. Which of the following types of prepayment penalties requires a borrower to provide the lender with some combination of U.S. Treasury securities that will serve to replace the cash flows of the loan being paid off?

A. Yield-maintenance prepayment penalties B. Prepayment lockout C. Defeasance prepayment penalty D. Curtailment penalty Ans: C Difficulty: Basic Learning Objective: 2

8. The expected stream of rental income is capitalized into value by converting expected future cash flows into present value through a process called:

A. amortization B. discounting C. compounding D. accounting Ans: B Difficulty: Basic Learning Objective: 3

16. When a buyer acquires a property having an existing mortgage loan, a decision must be made as to whether or not the subsequent owner of the property can preserve the loan. If the buyer does not add his or her signature to the note, the buyer does not take on any personal liability. In this case, the buyer is said to:

A. assume the old loan B. purchase the property subject to the existing loan C. obtain the property through the use of a contract for deed. D. foreclose on the property Ans: B Difficulty: Intermediate Learning Objective: 8

10. In a mortgage agreement, the borrower conveys to the lender a security interest in the mortgage property. The lender, i.e. the individual who receives the mortgage claim, is known as the:

A. broker B. mortgagor C. agent D. mortgagee Ans: D Difficulty: Basic Learning Objective: 4

21. Assume that an individual has just lost his job and has been consistently late paying his bills. The bank recognizes deterioration in the individual's credit score and has notified him that he must pay his home equity line of credit in full. The mortgage clause that makes this possible is known as the:

A. demand clause B. insurance clause C. escrow clause D. exculpatory clause Ans: A Difficulty: Intermediate Learning Objective: 2

19. A developer plans to place a subdivision slightly outside the city limits in an area that is rapidly developing. However, the city claims to have the right to control urban development even in the proposed area. The right the city is attempting to invoke is referred to as:

A. extraterritorial jurisdiction.

1. When viewed as a tangible asset, real estate can be defined as the land and its permanent improvements. Improvements on the land include:

A. fences B. walkways C. sewer systems D. streets Ans: A Difficulty: Basic Learning Objective: 1

8. Standard mortgage loans require monthly payments typically composed of two components: interest and principal repayments. When scheduled mortgage payments are insufficient to pay all of the accumulating interest, causing some interest to be added to the outstanding balance after each payment shortfall, the loan is said to be:

A. fully amortizing B. partially amortizing C. nonamortizing D. negatively amortizing Ans: D Difficulty: Basic Learning Objective: 2

5. As of 2011, the single largest asset category in the net worth portfolios of households is:

A. government and corporate bonds B. stocks and mutual fund shares C. consumer durable goods D. housing Ans: D Difficulty: Intermediate Learning Objective: 4

12. Each property has unique features, whether it is its age, the building design of its structures, or its location. As such, real estate markets consist of assets that are considered:

A. homogeneous B. heterogeneous C. substitutes D. complements Ans: B Difficulty: Basic Learning Objective: 5

22. A primary determinant of the feasibility of new construction is the relationship between the current level of property prices and the cost of new construction. We would expect the supply of properties to:

A. increase if current property values are greater than the cost of construction B. decrease if current property values are greater than the cost of construction C. increase if current property values equal the cost of construction D. decrease if current property values equal the cost of construction Ans: A Difficulty: Intermediate Learning Objective 2

4. The size of a single family residential lot is typically:

A. less than one acre B. between one and two acres C. between two and three acres D. greater than three acres Ans: A Difficulty: Intermediate Learning Objective: 2

17. Investors in real estate can choose to hold properties directly in the private market or indirectly through publicly traded real estate securities. The market for buying selling, and leasing real estate can be characterized by all of the following EXCEPT:

A. localized markets B. highly segmented markets C. privately negotiated contracts D. low transaction costs Ans: D Difficulty: Intermediate Learning Objective: 5

14. By the third quarter of 2011, U.S. households had accumulated $6.2 trillion in housing equity, which represents about 11 percent of their net worth. What proportion of U.S. households own their home?

A. one-third B. one-half C. two-thirds D. three-fourths Ans: C Difficulty: Intermediate Learning Objective 4

2. A significant number of mortgage loans use adjustable interest rates, in which the interest rate of the loan is tied to an index rate that fluctuates over time. For income-producing property, the most common index rate is the:

A. one-year U.S. Treasury constant maturity rate B. prime rate C. London Interbank Offered Rate (LIBOR) D. cost-of-funds index Ans: C Difficulty: Intermediate Learning Objective: 1

15. The national government can have a significant impact on the value of real estate through:

A. property tax policy B. income tax policy C. building Codes D. real estate licensing requirements Ans: B Difficulty: Intermediate Learning Objective: 3

4. Most Adjustable Rate Mortgage (ARM) loans have been marketed with a temporarily reduced interest rate commonly referred to as a:

A. rate cap B. teaser rate C. payment cap D. prepayment rate Ans: B Difficulty: Basic Learning Objective: 1

9. Capital markets can be divided into four main categories: private equity, public equity, private debt, and public debt. An example of a real estate asset that trades in the private equity market is:

A. real property B. home mortgages C. equity REITs D. mortgage backed securities Ans: A Difficulty: Intermediate Learning Objective: 3

9. With most standard home loans, the lender can hold the borrower personally liable in the event of a default. Such loans are commonly referred to as:

A. recourse loans B. nonrecourse loans C. conforming loans D. nonconforming loans Ans: A Difficulty: Basic Learning Objective: 2

21. One of the main criticisms of property taxes is that the property tax of lower income households is higher than that of higher income households, as a percentage of their respective incomes. In other words, taxes are criticized for being:

A. regressive

20. In addition to numerous congressional acts that focus more on national regulation, laws have been created that affect the practice of home mortgage lending at a community or neighborhood level. For example, laws have been enacted to prevent lenders from avoiding certain neighborhoods without regard to the merits of the individual loan applications, a practice more commonly referred to as:

A. rescinding B. redlining C. assuming D. holdout Ans: B Difficulty: Basic Learning Objective: 9

13. Consistently the investment target of pension funds, publicly traded real estate companies, and real estate funds, large commercial properties valued well over $10 million are often referred to as:

A. segmented property B. investment-grade property C. speculative-grade property D. immobile property Ans: B Difficulty: Basic Learning Objective: 5

11. Competition for the currently available supply of locations and space coupled with the existing supply of leasable space, determines:

A. the current level of rental rates for each submarket and property B. the riskiness of the expected cash flows of an income-producing property C. the timing of the expected cash flows of an income-producing property D. the cost of financing the purchase of a property Ans: A Difficulty: Intermediate Learning Objective: 3

3. Development taking place in rural areas well beyond the urban fringe is commonly referred to as:

A. urban sprawl

16. The required rate of return that an individual demands on a real estate investment is determined in the:

A. user market B. capital market C. government D. local market Ans: B Difficulty: Intermediate Learning Objective: 3

While some property owners choose to perform both the property and asset manager functions themselves, many commercial property owners choose to employ professional property managers instead. The property manager works under a management contract in which the manager is empowered to serve as the owner's fiduciary. This type of relationship is more commonly referred to as a(n):

Agency Relationship

Cities such as New York are able to host a variety of complex industries because of the development of specialized resources that support their growth. When specialized resources emerge in response to demand from multiple industries, this is referred to as:

Agglomeration Economies

According to the bid-rent model, which of the following changes in the model's underlying assumptions would most likely result in a decrease in rents for properties closest to the central business district (CBD)?

An increase in the average traveling speed of the individual's commute

The large and generally well-known retailers who draw the majority of customers to a shopping center are more commonly referred to as:

Anchors

Concerned with a potential information asymmetry problem, state legislators have been proactive in passing legislation that protects the rights and interests of tenants within which of the following property types?

Apartment

The location of competitors within a particular land use area may be influenced by whether the types of services and products are convenience activities or comparison activities. Which of the following is an example of a comparison activity?

Apparel Store

While it is often sufficient to rely on informal methods of estimating the market value of real estate assets, the complexity and large dollar value of many real estate decisions dictate that formal estimates based on methodical collection and analysis of relevant market data should be utilized. The unbiased written estimate of the market value of a property is commonly referred to as a(n):

Appraisal

Intangible Assets

Are nonphysical things and include contractual rights (e.g., mortgage and lease agreements), financial claims (e.g., stocks and bonds), interests, patents, or trademarks.

Tangible Assets

Are physical things, such as automobiles, clothing, land, or buildings.

Real estate appraisal is often considered "more art than science," since identifying truly comparable properties is a subjective process. Therefore, it is essential that a comparable property transaction at least meets the requirement that it was fairly negotiated under typical market conditions. Which of the following types of transactions would be most appropriate for use in the sales comparison approach to valuation?

Arm's-length transactions

Though difficult to accurately measure, the market value of U.S. real estate held by non-real estate corporations is estimated to exceed $10 trillion. All of the following are examples of noninvestible commercial real estate EXCEPT:

Assembly plant building owned by a group of investors as part of an LLC

The real estate industry applies which of the following labels to individuals who are responsible for the decisions that affect the physical, financial, or ownership structure of the property.

Asset manager

Some tenants who are subject to long-term leases may desire to transfer all of their tenant rights and obligations to another party. This is commonly referred to as a(n):

Assignment

Based on your understanding of the relation between risk and the phases of an income producing property's life, which phase would you expect to entail the highest risk? a. Lease-up stage b. Development and construction phase c. Stable operation phase d. All three stages of a property's life have similar and equal risk

For most commercial property types, lease lengths can vary considerably. Therefore, both parties must tradeoff between the advantages and disadvantages associated with particular leasing terms. Owners may prefer longer leases for all of the following reasons except: a. Delay of re-leasing costs b. Gain flexibility c. Stability of future cash flows d. Reduction of risk associated with declining interest rates

Single-year-return measures and ratios can be categorized into three groups: profitability ratios, multipliers, and financial ratios. All of the following are considered financial ratios except: a. Operating expense ratio b. Net income multiplier c. Loan-to-value ratio d. Debt yield ratio

The rental income generated by a lease can depend significantly on the proportion of property-level operating expenses paid by the tenant. In which of the following types of leases is the tenant responsible for all operating expenses? a. Gross lease b. Triple net lease c. Net-net lease d. Net lease

The two most important determinants of the classification of an office property are age and obsolescence. Which of the following classes includes office buildings that are older and reasonably maintained, but are below current standards for one or more reasons? a. Class A office b. Class C office c. Class B office d. Investment grade property

33. Given the following information, compute the taxable value for the particular piece of property in dollar terms. Market value of property: $500,000, Assessed value of property: 85 % of the market value of the property, Exemptions: $50,000, Taxes paid: $8,250.

B. $375,000

30. Given the following information, compute the property tax rate for the community in percentage terms. Total budget expenditures: $108 million, Total non-property tax income: $50 million, Total assessed value of all properties: $2 billion, Total exemptions: $550 million.

B. 4.0%

5. After a structure is built, it is impractical for even a building expert to fully assess the quality of the construction and the safety hazards it may harbor. This is an example of which of the following problems that plagues private real estate markets?

B. Incomplete information

11. In order for the board of adjustment to approve a variance, all of the following conditions must be met EXCEPT:

B. The condition is common to other parcels of land in the vicinity

17. All of the following statements are true in describing the determination of just compensation EXCEPT:

B. The value of the property is determined solely by its current use.

18. Real estate taxes represent the largest single source of revenue for a large portion of local governments. Most property taxes are applied in relation to the value of the property, or in other words, they are:

B. ad valorem taxes

6. Growth management laws at the state level require local jurisdictions to plan for and meet certain requirements. One such requirement prohibits local development unless adequate infrastructure, schools, police/fire protection, and social services have been put in place first. This requirement is referred to as the:

B. concurrency requirement

14. Negative externalities can diminish a property's value by imposing costs on the community at large. In order to offset this detrimental impact, economists advocate "internalizing" these externalities by implementing:

B. impact fees

28. In efficient financial markets, unregulated competitive bidding should bring about the most productive use of an asset and the price paid for that asset should reflect fair value based on its usefulness. In real estate, this is not always the case. For example, there is no substitute for certain pieces of land which gives the owner a bargaining advantage in determining the value of the land. This feature of real estate markets is commonly referred to as:

B. locational monopoly

9. When a zoning ordinance is revised, some existing land uses then fall outside the new zoning classification. These land uses are referred to as:

B. nonconforming uses

BTCF is a levered cash flow, while NOI is an unlevered cash flow

The use of financial leverage in purchasing an income-producing property can affect the amount of cash required at acquisition, the net cash flows from rental operations, the net cash flows from the eventual sale of the property, and the ultimate return on invested equity. Assuming the going-in IRR is greater than the effective borrowing cost, if an investor increases his leverage rate, say from 75% to 80%, we would expect which of the following to occur?

Both NPV and going in IRR increase

In retail property types, rents are quoted on the basis of which of the following? a. Usable area b. Gross floor area c. Gross leasable area d. Rentable area

Some tenants who are subject to long-term leases may desire to transfer all of their tenant rights and obligations to another party. This is commonly referred to as a(n) a. Sublease b. Concession c. Assignment d. Lease option

The two most important determinants of the classification of an office property are age and obsolescence. Which of the following classes includes office building that are older and reasonably maintained, but are below current standards for one or more reasons? a. Class A office b. Class B office c. Class C office d. Investment grade property

The choice of ownership form for pooled equity investments depends heavily on federal tax considerations. Which of the following ownership structures suffers from the major disadvantage of double taxation?

C Corporation

36. Given the following information, calculate the total annual tax liability of the homeowner. Market value of property: $350,000, Assessed value of property: 40 % of the market value, Exemptions: $2,000, State Millage Rate: 0.25 mills, County Millage Rate: 13.70 mills.

C. $1,925.10

32. Given the following information, compute the effective tax rate for the particular piece of property in percentage terms. Market value of property: $325,000, Assessed value of property: $250,000, Exemptions: $50,000, Taxes paid: $5,363.

C. 1.65%

35. Given the following information, calculate the effective tax rate expressed in mills. Market value of property: $280,000, Assessed value of property: 50 % of the market value, Exemptions: $2,000, Annual tax liability: $4,685.10.

C. 16.73 mills

31. Tax rates are usually stated in mills. Assuming the tax rate in percentage terms is 6.5%, convert this rate to mills.

C. 65 mills

8. Which of the following tools of public land use control represents the earliest method of police power to regulate land use? (Hint: Standards for energy efficiency and sustainability are the most recent trends in the application of this land use control)

C. Building Codes

2. Externalities can play an important role in determining a property's price, either by adding value through positive externalities or by diminishing value through negative externalities. Which of the following is most likely to be considered a negative externality?

C. Public assistance facilities such as homeless shelters.

4. It was not until the late 1960's that land use controls moved to the forefront of public interest, as the belief that the environment was an endless and costless resource was replaced with the notion that the world was a closed system with limited space, air, water, and other resources. Environmentalists coined which of the following terms to refer to this new point of view?

C. Spaceship earth

29. Nearly half of states in the U.S. use the sale of tax lien certificates to manage defaulted property taxes. The certificates are auctioned to the public at:

C. a discount from the face value of the property taxes due

16. The right of government to acquire private property, without the owner's consent, for public use in exchange for just compensation is referred to as:

C. eminent domain

1. While most real property in the United States is privately owned, government regulations limit private property use and therefore play an important role in the determination of property value. Proponents of government intervention argue that regulation is needed to address the unintended and unaccounted for consequences of one land user upon others, more commonly referred to as:

C. externalities

24. A public planning movement that explicitly advocates a cul-de-sac hierarchy of development, an automobile oriented society, and separated land use is more commonly referred to as:

C. traditional residential planning

Real Estate (viewed purely as a tangible asset)

Can be defined as the land and its permanent improvements.

Profitability ratios, income multipliers, and financial risk ratios can be used to provide a quick assessment of a property's relative value. Which of the following ratios measures the overall income-producing ability of the property?

Capitalization rate

Single year return measures and ratios can be categorized into three groups: profitability ratios, multipliers, and financial ratios. All of the following are considered financial ratios EXCEPT:

Capitalization ratio

A new residential development will face competition from other new developments, other builders, and sales of existing homes. To determine if demand in that market segment will be sufficient to justify proceeding with the project, a developer would be most interested in estimating a:

Capture Rate

Providers of convenience activities find it profit-maximizing to disperse over the region of potential customers to the point where each establishment is equidistant from another and is separated by the minimum distance that allows sufficient customers to support each establishment. The resulting pattern of establishment locations is referred to as:

Central place pattern

While college-level courses are not widely available, a number of professional and trade organizations exist in the field of property management. Which of the following certifications awarded by the Institute of Real Estate Management is aimed at individuals who manage larger, residential, office, industrial, or retail properties?

Certified Property Manager (CPM)

Because a city's output capacities change slowly over time, it is important to understand the supply side (long-run) factors affecting urban growth. Which of the following would NOT be considered a supply-side factor that impacts a city's economic growth?

City's export activity

Class C office

The going-in capitalization rate can vary significantly by property quality. Which of the following classes of properties within a particular property type would be expected to have the highest cap rates?

Class C properties

Six suburban office buildings have been constructed along six consecutive blocks in Roseland, New Jersey. This is an example of:

Clustering

Of the $3.2 trillion in outstanding mortgage debt in the U.S., approximately 714% is privately held by institutional and individual investors. Which of the following institutions is the largest single source of private mortgage funds?

Commercial banks

Up until the market for these instruments collapsed in 2008, which of the following was the fastest-growing source of long-term commercial mortgage funds from 2002-2007?

Commercial mortgage backed securities (CMBS)

Raw Land

Commonly used to refer to a larger area that does not include any improvements.

A city's economic base can be viewed in terms of a multiplier process, in which the money that is brought in through export activities is then respent within the city. Which of the following economic activities is the least likely to be considered a high-impact or high-multiplier economic base activity?

Computer Assembly

When the supply of space exceeds the demand, it is common for owners to provide the tenant with a period of free or perhaps reduced rent. This is commonly referred to as a(n):

Concession

In contrast to conventional market analysis, the "story" approach to market research starts with an analysis of:

Conditions in the property specific market

Professor James Graaskamp often asserted that when one buys real estate, what one is buying is a set of assumptions about the future. Therefore, it is not surprising that the beginning point of the market research process is to:

Construct a market-defining "story"

Maintenance and repair of a property is an ongoing process that can be divided into four principal categories. Which of the following classifications includes ordinary repairs to a building on a day-to-day basis (e.g. repairing a broken window, fixing a leaking roof)?

Corrective Maintenance

Credit tenants

Assume a small office building has a total usable area of 40,000 square feet and 6,000 square feet of common area. Tenant H occupies 5,000 square feet of usable area. Tenant H's annual rental rate is $20 per sq ft. How much total rent does Tenant H pay per year? a. $170,000 b. $155,667 c. $123,875 d. $115,000

Both owners and managers must carefully designate their responsibilities in the management agreement. In a management agreement, all of the following would typically be responsibilities of the property manager except a. Maintenance of financial accounts for money collected from tenants b. General property management c. Reports on property performance d. Liability

Given the following information, calculate the effective monthly rent payment. Lease Term: 10 years, Concession: 1 year free rent to be spread over the term of the lease, Rental Space: 5000 square feet, Rental Rate: $30 per square foot per year, Landlord's discount rate: 10%. a. $4,676 b. $5,901 c. $7,081 d. $10,621

In commercial leases, rents do not necessarily have to be kept constant over the life of the lease term. One option is for there to be pre-specified increases in the contract rental rate over time, sometimes referred to as "step-ups" or "escalations." This type of rent treatment is commonly referred to as: a. Flat rent b. Indexed rent c. Percentage rent d. Graduated rent

It is common for investors in real estate to use mortgage debt to help finance capital investment. The use of debt can have a profound impact on the expected cash flows for a particular property. Which of the following terms refers to cash flows that represent the property's income after subtracting any payments due to the lender? a. Compounded cash flows b. Discounted cash flows c. Compounded cash flows d. Levered cash flows

The developer will face a variety of costs throughout the project's life. Which of the following would be classified as a soft cost? a. Cost of land b. Labor cost of subcontractors for construction c. Costs of materials d. Legal fees of the permitting process

The large and generally well-known retailers who draw the majority of customers to a shopping center are more commonly referred to as: a. Outlets b. Strips c. Chains d. Anchors

The real estate industry applies which of the following labels to individuals who are responsible for the decisions that affect the physical, financial, or ownership structure of the property? a. Property manager b. Leasing manager c. Regional manager d. Asset manager

There are three main types of income subject to federal taxation. Which of the following types of income includes income generated from rental real estate investments? a. Active income b. Portfolio income c. Residual income d. Passive activity income

With a site under control, the developer will begin to evaluate the feasibility of the project. The main tool that a developer will use in determining the financial feasibility of a project is: a. Cost approach to valuation b. Repeat-sales approach c. Direct capitalization d. Net present value (NPV) analysis

Given the following information, calculate the before-tax equity reversion (BTER): NOI: $89,100; annual debt service: $58,444; net sale proceeds: $950,400; remaining mortgage balance: $621,025: a. $30,656 b. $343,674 c. $572,582 d. $329,375

D Net sales proceeds- remaining mortgage balance

27. In the history of eminent domain, the Kelo v. New London, Connecticut decision of the U.S. Supreme Court in 2005 affirmed the possibility of a community being:

D. Able to use eminent domain to acquire property for private development if it serves public purpose even if the current land use is not blighted.

13. State and federal control of land uses has increased greatly over the past 40 years due in part to an increased awareness of environmental hazards. Which of the following federal environmental control laws was responsible for establishing the "Superfund" to finance emergency responses and cleanups of abandoned and unregulated waste dumps?

D. Comprehensive Environmental Response Compensation and Liability Act

25. Eminent domain is the right of government to acquire private land, without the owner's consent, for public use, with due process and just compensation. The legal procedure for exercising the right of eminent domain is referred to as:

D. Condemnation

12. A traditional zoning ordinance includes all of the following EXCEPT:

D. Performance standards

23. Zoning ordinances that tend to exclude lower income groups by large lot size, or that do not adequately provide low- and moderate-income housing are referred to as:

D. exclusionary uses

22. In the state of Florida, for example, homeowners may qualify for a tax exemption in which up to $50,000 will be deducted from the assessed value of the property before taxes are calculated as long as the property owner occupies a home as the family's principal residence and has claimed residency within the state. This exemption is better known as the:

D. homestead exemption

7. A contemporary planning movement that explicitly advocates a traditional grid pattern of development designed to give pedestrian life priority over motor vehicles (e.g., including narrowed streets with houses close to the street and garage access through side alleys) is commonly referred to as:

D. new urbanism

10. When land use controls impose exceptional hardship and loss of value, a relief mechanism must be provided. This relief is referred to as a:

D. variance

Changes in the discount rate used to complete net present value analysis can have a significant impact on the estimated value of the investment and therefore affect the overall investment decision. As the required internal rate of return (IRR) increases, the net present value will:

Decline

The use of financial leverage when investing in real estate is a double-edged sword. While increased leverage may allow the investor to "purchase" higher expected returns, the "price" of doing so is an increase in which of the following risks?

Default Risk

Property Markets

Determine the required property-specific investment returns, property values, capitalization rates, and construction feasibility.

In discounted cash flow (DCF) analysis, the sale price of the property must be estimated at the end of the expected holding period. The most common method for determining the terminal value of the property is the:

Direct Capitalization Method

There are a number of ways in which individual and institutional investors can hold investments in commercial real estate as a part of their portfolio. One way is to purchase and hold the title to the actual commercial property, which gives the owner complete control of the asset. This type of transaction would be considered which of the following?

Direct investment in private commercial real estate equity

A city's potential for growth or its susceptibility to decline is determined by a set of economic activities that the city provides for the world beyond its boundaries. Economists refer to this set of activities as a city's:

Economic Base

Several techniques can be used to obtain an indication of land value. The cost approach to valuation would most likely be used for which of the following properties?

Education facility

The management agreement provides for a management fee that is usually in the range of 3 to 6% of which of the following measures of property income?

Effective Gross Income

The internal rate of return (IRR) on a proposed investment is the discount rate that makes the net present value of the investment:

Equal to zero

Financial risk ratios

The sequence of adjustments to the transaction price of a comparable property would make no difference if all adjustments were dollar adjustments. However, if percentage adjustments are involved then the sequence does matter. In making adjustments to a comparable property to arrive at a final adjusted sales price, the proper sequence for the following adjustments would be:

Financing terms, market conditions, location

The choice of which method to use in constructing the contracted rental rate can be impacted by the term of the lease. With a shorter lease term, which of the following methods is most likely to be observed?

Flat rent

Newer industrial parks have begun to specialize in providing space that can be configured to suit the diverse needs of various tenants. This type of industrial space is more commonly referred to as:

Flex space

Retail establishments are found in a variety of forms, the simplest of which is: (Hint: fast-food franchise)

Freestanding retail outlet

Accrued depreciation is the difference between the current market value of a building and the total cost to reproduce it new. One reason for this difference is related to changes in tastes, preferences, technical innovations, or market standards. This is commonly referred to as:

Functional obsolescence

Gain flexibility

A recent trend in commercial leases is for tenants to negotiate a cap on the amount of certain operating expenses they are required to reimburse the landlord. Such caps are usually negotiated on operating expenses thought to be at least partially controllable by the owner. Which of the following would typically be considered an operating expense controllable by the owner?

General maintenance

In most pooled ownership forms a single partner is empowered to act on behalf of the investors in terms of making property investment decisions. Based on your understanding of the different types of pooled ownership which of the following structures would we expect this issue to be the least prevalent?

General partnership

The choice of ownership form for pooled equity investments can also depend on the desire to avoid personal liability. Which of the following ownership structures suffers from the major disadvantage of unlimited liability for all investors?

General partnership

Computer software systems that enable one to manipulate and "map" information with great flexibility and speed are referred to as:

Geographical Information Systems (GIS)

In retail property types, rents are quoted on the basis of which of the following?

Gross leasable area

In contrast to public markets, private markets are characterized by individually negotiated transactions that take place without the aid of a centralized market. Therefore, private markets will generally have:

High transaction cost and low liquidity

Land

In practice the term ___ may include more than simply the earth; it may also include the improvements TO the land. For example, the term ____ is often used to refer to a building site, or lot, and includes the infrastructure but not any structures.

Improvements ON the Land

Include any fixed structures such as buildings, fences, walls, and decks.

Improvements TO the Land

Include the components necessary to make the land suitable for building construction or other uses. These improvements are often referred to as infrastructure and consist of the streets, walkways, storm water drainage systems, and other systems such as water, sewer, electric and telephone utilities that may be required for land use.

It may be appropriate for a real estate professional to utilize different approaches for estimating the market value of a property depending upon the particular property type and use. Which of the following approaches would be most applicable when considering the valuation of retail office space (i.e., which approach would receive the most weight in the valuation process

Income approach

Just as it is important for an investor to consider the impact of financial leverage on her return, it is also necessary to account for the effect of income taxes. How would the presence of income taxes impact the levered going-in IRR?

Income taxes reduce the levered going in IRR

Which of the following would be categorized as a cause of external obsolescence?

Increased traffic flow due to more intensive use in the local area

At the conclusion of the traditional sales comparison approach to valuation, the appraiser evaluates and reconciles the final adjusted sale prices into a single value for the subject property. This single value is commonly referred to as:

Indicated value

The growth of the motion picture industry in Los Angeles, the petrochemical industry in Houston, the software industry in "Silicon Valley," are all examples of how the growth of an industry within a city can create cost advantages for future growth. Economists refer to this phenomenon as:

Industry Economies of Scale

A fishing company was formed in Juneau, Alaska. Over the next decade, a canning plant, a processing plant, and a boat repair facility also opened in Juneau. This is an example of:

Industry economies of scale

Most research oriented universities have many different colleges, each with separate administrations, students, curricula, and facilities. However, the university continues to exist as a total unit because of:

Industry economies of scale

While the general concepts of investment value and market value are very similar, there is an important distinction between the two. All of the following statements regarding investment value are true EXCEPT:

Investment value is based on the expectations of a typical, or average, investor.

The key to meaningful valuations in real estate is to use defensible cash flow estimates. All of the following statements are true in regards to generating accurate cash flow estimates EXCEPT:

Investors should only consider recent events, rather than long-term trends when evaluating revenue and expense items

There are two major types of REITs: Equity REITs and Mortgage REITs. Each differs in terms of what they invest in. Which of the following choices best describes the investment focus of an Equity REIT?

Invests primarily in and operates commercial properties

Acre

Is defined as 43,560 square feet, or about 209 feet square.

Survey research has been applied to real estate markets at many levels. Despite its frequent application, analysts must be cautious with survey use because:

It can be fraught with abortive errors.

Real estate appraisers generally distinguish among the concepts of market value, investment value, and transaction value. Which of the following statements best describes the concept of market value?

It is an estimate of the most probable selling price of a property in a competitive market

A planned unit development (PUD) is a residential development that differs from traditional residential subdivisions in all of the following ways EXCEPT:

It typically has larger individual lots with extensive side-yards on the property.

Investment-grade Properties, or Institutional-grade Real Estate

Lager, more valuable commercial properties, generally well over $10 million. This is the segment of the property market targeted by institutional investors such as pension funds, publicly traded real estate companies, and real estate funds.

Based on your understanding of the effect of agglomeration economies in real estate, you would expect institutional investors to most favor real estate investments in which of the following areas?

Large urban markets

An important piece of criteria for investors to consider when deciding between real estate investment opportunities and investing in stocks or bonds is the effect of income taxes on their return. For most investors, the effective tax rate on commercial real estate is:

Less than the effective tax rate on a stock or bond investment

The lease is a contract between the owner and the tenant that transfers exclusive use and possession of the space to the tenant in return for rent or other consideration. In this arrangement, the owner is referred to as the:

Lessor

Levered cash flows

Liability

In recent years, a number of pooled ownership structures have emerged that have changed the analysis of ownership form selection for many investors. Which of the following ownership structures is generally used for small, local investments that are marketed to accredited, but non-institutional investors?

Limited liability company

In recent years, which of the following pooled ownership structures are used by private funds that are trying to attract capital from very high net worth and institutional investors?

Limited partnership

The demand for access between land uses is considered the "gravity" that holds a city together. These relationships between land uses are commonly referred to as:

Linkages

When employing the sales comparison approach, appraisers must consider numerous adjustments to convert each comparable sale transaction into an approximation of the subject property. Adjustments are divided into two groups: transactional adjustments and property adjustments. All of the following are transactional adjustments EXCEPT:

Location

Suppose an owner is trying to decide whether or not to make improvements to her property. Given the following information, what would be the value added or potential loss if the improvements are undertaken? Current rent per square foot: $8.75, Anticipated rent per square foot: $14.50, Cost of improvements: $250,000, Square feet: 34,000.

Loss of $54,500

While a sublease and an assignment are two distinct choices for a tenant who wishes to transfer his rights during the term of a lease, both agreements:

Maintain that the original tenant be held liable for fulfilling the original lease unless otherwise specified

In contrast to base activities, local economic activities (or secondary activities) serve the local business and households that are recirculating the income derived through the city's economic base. In other words, we can distinguish local economic activities from export activities by thinking about whether or not the activity brings money into the city from outside sources. Which of the following activities is NOT an example of land use for local economic activity?

Manufacturing Center

Preferences of households can vary with time, prosperity, and context. The nuances in the preferences or needs of market subgroups are commonly referred to as:

Market Segmentation

Estimating the market value of real estate is complicated by the unique characteristics of real estate markets. In contrast to stock markets, real estate markets are characterized by all of the following EXCEPT:

Market prices are revealed almost instantaneously to prospective buyers

Real estate market research is an important process used by analysts to facilitate a better understanding of a property's future profit potential. All of the following statements regarding market research are true EXCEPT:

Market research consists of a series of facts that fails to consider the role of investor behavior in the decision making process

In real estate markets, a transaction occurs only when the investment value of the buyer exceeds the investment value of the seller. The buyer's investment value is the ________ that he or she would be willing to pay for a particular property, while the seller's investment value is the _______ that he or she would be willing to accept.

Maximum; minimum

The most common definition of a city used for government data collection and reporting, identified as a single labor market area centered around a city with a population of at least 50,000 people, is referred to as a:

Metropolitan statistical area

The majority of residential units in the U.S. are contained in multifamily structures, or apartment buildings that contain five or more housing units. Which of the following multifamily structures will range in height from four to nine stories and are typically found in both cities and suburbs?

Midrise apartment buildings

Real estate asset managers perform certain functions that would not be expected of asset managers who deal with stock and bond portfolios. Which of the following functions would you expect both asset managers in real estate as well as stocks/bonds to perform?

Monitor Asset Performance

Understanding the revenue generating ability of the core export activities of a local area has important implications on the market value of real estate. When the income that these activities generate is re-spent within the community on other local goods and services, the community is benefiting through a:

Multiplier Process

Given the following expected cash flow stream, determine the NPV of the proposed investment in an income producing property and determine whether or not the investment should be pursued. Investment Horizon: 5 years; Expected Yearly Cash Flow in each of the next five years: $127,628. Expected Sale Price at end of 5 years: $1,595,350; Opportunity Cost of Investment 6%; Current Market Price of Property: $1,750,000.

NPV is -$20,246; Decision is not to invest

With a performance-based management contract, an asset manager's fees are tied directly to the rate of return earned by investors on the portfolio of managed properties relative to a benchmark. In private commercial real estate, the choice of benchmarks for performance is limited in large part to return indices provided by which of the following organizations?

National Council of Real Estate Investment Fiduciaries

A property management contract establishes an agency relationship between the manager and the owner. Considering that the management fee is often calculated as a percentage of gross income, this would seem to create an agency problem in that the agreement does not give managers the incentives to control operating expenses while they attempt to increase rental income. Though seldom the case, basing the property management fee on which of the following measures would, in theory, better align the interests of the owner and manager?

Net Operating Income

As part of the data analysis step in the appraisal process, it is necessary to consider the highest and best use of the property in question. In regards to determining highest and best use, all of the following statements are true EXCEPT:

No financial limits are considered when determining the property's best use

Of the following choices, which best describes the operating expenses that you would expect to be the paid by the tenant in a net lease agreement?

Only property taxes

To overcome the potential shortcomings of single-year decision making metrics, many investors in real estate also perform multiyear discounted cash flow (DCF) valuation. DCF valuation differs from the single-year ratio analysis in all of the following ways EXCEPT:

Only with DCF must the investor use a defensible cash flow estimates that incorporates appropriate measures of income and expenses

Direct investment in private commercial real estate markets is a preferred means of ownership for the largest institutional market participants. Which of the following types of institutions rely on stable income from commercial real estate properties to pay out retirement benefits?

Pension funds

When fund managers collect contributions from multiple sources and "commingle" them to purchase properties, this is referred to as the use of commingled real estate funds. Which of the following institutional investors utilize commingled real estate funds for approximately one-half of their investments in real estate?

Pension funds

As with any valid contract, enforceable leases must meet a number of requirements. One of these requirements is for each party to provide appropriate consideration. In a lease, which of the following constitutes the landlord's consideration?

Permission to occupy the space or property

In most small to medium private real estate deals, syndicators play important roles within the origination, operation, and completion phases of a real estate syndicate's life. All of the following are responsibilities of the syndicator in the operation phase of a syndicate's life EXCEPT:

Prepare the properties for sale

The $6.5 trillion total market value of commercial real estate can be broken into four quadrants. Which of the following sectors of the commercial real estate market currently accounts for the largest proportion of market value?

Privately held equity

In the initial round of market analysis, analysts will attempt to provide key numbers that characterize the current condition and trend in the market. For rental retail space, the key market parameters in question would most likely include all of the following EXCEPT:

Projected sales rates

An important effect of agglomeration economies on real estate is its impact upon market risk. Based on your understanding of this relation, which of the following statements is TRUE?

Properties located in a city with more advanced development of agglomeration economies will carry less risk and therefore suffer a smaller price decline during an economic downturn.

Commercial real estate returns are determined in no small part by how well the ongoing management function is performed. Management decisions can be classified into two categories: property management and asset management. Which of the following functions would be considered a primary responsibility of an asset manager?

Property acquisitions and dispositions

A popular adage in real estate is that property value is all about "location, location, location." However, for most property types in nonresidential realms, nonlocational requirements are equally or even more important. All of the following are examples of nonlocational factors EXCEPT:

Proximity to modes of public transportation

A tool used by real estate analysts to relate a consumer's activities, interests, opinions, and values to a consumer's demographics is referred to as:

Psychographics

Once possession and control are conveyed in a lease agreement, the owner must provide the tenant with uninterrupted use of the property without any interference from any entity that may threaten to impose upon the tenant's leasehold interest in the property. In other words, the tenant is entitled to which of the following?

Quiet Enjoyment

All of the following are responsibilities of the syndicator in the origination phase of a syndicate's life EXCEPT:

Raise additional investment capital

At the end of 2011, commercial banks and other financial institutions collectively owned $51 billion in commercial real estate equity. The vast majority of these holding are the result of which of the following types of investment by these institutions?

Real estate obtained as a result of borrower default and foreclosure

Heterogeneous [Products]

Real estate tends to be heterogeneous, meaning that each property has unique features. Age, building design, and especially location combine to give each property distinctive characteristics. Real estate markets tend to be highly segmented due to the heterogeneous nature of the products.

Real Property

Real property is any property that is attached directly to land, as well as the land itself. Real property not only includes buildings and other structures, but also rights and interests. Real property can be either rental or residential. Any structures or improvements that are attached to the land must not be movable in order to be considered real property. Natural resources such as oil, gas and timber also qualify, because they are considered to be part of the land.

Property

Refers to anything that can be owned or possessed. Property can be a tangible or an intangible asset.

Personal Property

Refers to things that are movable and not permanently affixed to the land. For example, a motor home is personal property, while a custom "site-built' house is real property.

In contrast to maintenance and repair expenditures, which are operating expenses, the improvement decision generally involves a capital expenditure meant to increase the value of the structure. Which of the following classifications of improvements calls for the restoration of a property to satisfactory condition without changing the floor plan, form, or style of the structure?

Rehabilitation

The cost approach to valuation assumes the market value of a new building is similar to the cost of constructing it today. Which of the following terms refers to the expenditure required to construct a building of equal utility using modern construction techniques, materials, and design that eliminates outdated aspects of the structure?

Replacement cost

Many investors use mortgage debt to help finance capital investment for income-producing real estate. In doing so, the owner will receive income as long as the property produces enough income to cover all operating and capital expenditures, the mortgage payment, and all state and federal income taxes. Therefore, the owner's claim is commonly referred to as a:

Residual Claim

Most real estate investment trusts (REITs) are actively managed operating companies that typically focus their investments either by property type or geographic market. Which of the following commercial property types represents the largest proportion of REIT market value?

Retail

The choice of which method to use in constructing the contracted rental rate can also be impacted by the type of property being leased. With which of the following property types would one most expect to see a percentage rent method used?

Retail

The lease is a contract between a property owner and tenant that transfers exclusive use and possession of space to the tenant, but allows the owner to retake possession of the property at the expiration of the lease. Which type of interest allows the owner to retake possession at the end of a lease?

Reversion Interest

Despite the magnitude of their real estate holdings, many non-real estate corporations have historically expended little effort to manage these assets effectively. Recently, the development of which of the following markets has helped to quell concerns related to this issue?

Sale-leaseback

While there are several conventional approaches used to estimate the market value of real estate, which of the following is typically considered the most reliable approach?

Sales comparison approach

If all appraisal methods are appropriate for use in valuing a particular property, there is a clear order of preference that real estate professionals adhere to. Which of the following depicts the preferred order, with the most preferable approach being listed first and the least preferable listed last?

Sales comparison approach, income approach, cost approach

Which of the following models of urban form is characterized by radial corridors or wedges representing the pattern of residential land use in relation to the location of the central business district (CBD)?

Sector model

Ownership forms for pooled equity investment can differ in terms of how the entity's cash flows are distributed to its investors. Which of the following ownership structures requires cash flows to be allocated to each shareholder in proportion to his or her ownership of the entity, thereby preventing special allocations to multiple classes of investors?

Subchapter S corporation

Lenders may request that property owners of rental properties include a clause in their lease agreement that gives the lender the right to terminate the lease and evict the tenant, even if the tenant has fulfilled all of its responsibilities under the lease, in the case that the owner of the property defaults on her mortgage. This part of the lease agreement is more commonly referred to as a:

Subordination clause

Most appraisers would say that report writing is one of the most important functions that they perform. Assume that an appraiser is putting together a report for a single family home. Which of the following reporting options would be the most commonly used in this scenario?

Summary appraisal report

When property managers are looking to secure a mix of tenants for which "the whole is greater than the sum of its parts," or in other words a group of tenants that shares similar characteristics such that the experience of living together is mutually beneficial, they are seeking what is referred to as:

Synergism

Section 1031 of the Internal Revenue Code permits investors to defer some or all of the taxable gain that would ordinarily be due on the sale of a property if they exchange for "like-kind" property. In order to avoid income taxes, many investors attempted to make use of this tax code when disposing of commercial real estate assets. This led to the reemergence of which of the following forms of ownership in commercial real estate?

Tenancy in common

In an indexed lease, rents are dependent on a regularly reported index, most commonly the consumer price index (CPI). By using the CPI as an index rate, the risk of unexpected increases in general inflation is shifted to the _________, and therefore a _________ base rental rate will typically be required.

Tenant;lower

While net present value (NPV) and internal rate of return (IRR) analysis both may be used as investment decision criteria, there are some limitations to the IRR method that make its use as an investment criterion problematic in certain situations. All of the following are limitations of the IRR method EXCEPT:

The IRR methodology cannot be used to make comparisons across different investment opportunities.

Since most data for a given market study is not readily available, analysts must be creative in their use of data that they are able to obtain. The primary source for detailed household demographic information is:

The U.S. Bureau of the Census

In collecting data for nonresidential property analysis, it is helpful to understand the business community that currently exists in the specific area in question. A preliminary approach for ascertaining the number of firms by size, industry, and location is to obtain data from:

The U.S. Bureau of the Census: County Business Patterns

Development of subdivisions, apartments, offices, or other commercial structures can have a lead time of two years or more. In general, the longer the construction lead time:

The greater the amplitude of real estate cycles

The magnitude of an economic base multiplier depends upon the amount of money that "leaks" out through expenditures outside of the city limits. The economic multiplier tends to be higher with each of the following EXCEPT:

The less isolated the city is from the other cities.

While predicting real estate cycles is difficult, a key indicator used to evaluate where a property is within the cycle is:

The number of building permits issued

Suppose that a property owner plans on spending $15,000 per year over the next 5 years on maintenance and repairs. However, if she does not spend this amount, she will not be able to keep rents at market levels, vacancies will increase, and the resale value of the property in 5 years will be lower. Assume that she would lose about $7,000 a year in net income and would realize a loss of $85,000 in lower property value at the time of sale if maintenance is not maintained on the property. Determine the difference between the present value of the cost of maintaining the property and the loss to the owner if the property is not maintained assuming that the owner could earn a 7 percent return on any funds not invested in maintenance and repairs?

The present value of the maintenance costs $27,802 less than the present value of the averted loss

Capitalization Rate

The ratio of a property's annual net income to its value, is a fundamental pricing metric in commercial real estate markets. The capitalization rate, often just called the cap rate, is the ratio of Net Operating Income (NOI) to property asset value. So, for example, if a property was listed for $1,000,000 and generated an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%.

In the Elysian Forest example, the planned unit development was destined to be an unsuccessful venture from its inception because:

The target market was a nontraditional segment that relied heavily on a small portion of the local University City population

Favorable mortgage financing may have a significant impact on the transaction price of the particular property. If the comparable property was known to have had favorable financing terms negotiated into the transaction price, which of the following adjustments should take place? (Note: Assume that the comparable property cannot be dropped from the analysis as there are already limited comparable sales transactions)

The transaction price of the comparable property should be adjusted downward

Adjustments for physical characteristics are intended to capture the dimensions in which a comparable property differs physically from the subject property. If the only physical difference between the subject property and the comparable is that the comparable does not have a fireplace, which of the following adjustments should take place?

The transaction price of the comparable property should be adjusted upward

In the Palm Grove Office Complex example, the project was destined to be an ill-fated venture from its inception for all of the following reasons EXCEPT:

The zoning laws of the University City ultimately prevented the project's developers from starting the construction process

They fail to incorporate cash flows beyond the first year of the analysis

While there is no specific number of comparables that is required for every appraisal assignment, how many comparable sales are considered adequate as long as the properties are very similar to the subject property?

Three

To the extent the tenant is permitted to alter the leased premises, the lease should clearly state when this may be done, and under what circumstances. The lease must also be clear about the ownership of such improvements once completed. Which of the following terms refers to items of personal property that are attached to the real property, are paid for and installed by the tenant, and may be removed by the tenant at the termination of the lease?

Trade fixtures

Triple Net Lease

The estimated market value of investible commercial real estate in the United States at the end of 2011 was approximately $6.5 trillion. In terms of market size, which of the following asset categories is most closely related to commercial real estate?

U.S. Treasury securities

Real estate professionals have long supported strict standards of ethics and practice. Followed by all states and federal regulatory agencies, which of the following imposes ethical obligations and minimum standards that must be followed by all real estate professionals providing formal estimates of market value?

Uniform Standards of Professional Appraisal Practice (USPAP)

In constructing a market-defining "story," it is helpful to answer a series of fundamental questions around which analysis can be built. Which of the following questions is designed to identify the target market?

Who are the customers?

Suppose a developer is interested in building a new apartment community. Through her market research, the developer has determined that the target market segment potential in year 1 consists of 100 households. The developer believes that the target market segment potential will grow by 5% annually over the next five years. If the developer projects a capture rate of 25% for each of the next five years, but is only to sell 26 apartment units in each of the next five years, in which year will her actual sales first fail to meet her projected sales numbers?

Year 3

Assume a retail tenant is paying a base rent of $120,000 per year (or $10,000 per month). In addition, the tenant must pay 5 percent of gross store sales in excess of $145,000 per month as percentage rent. If the store produces $180,000 in gross sales in a month, what is the total rent due for the month? a. $11,750 b. $12,450 c. $11,890 d. $21,900

If the per share stock price of a REIT is greater than its per share net asset value (NAV), the REIT is said to be selling at:

a premium

An owner whose property is in a strong market position, where fewer services can be offered to tenants for the same dollar of rental income and where the owner will not lose tenants if the property is under maintained, is said to participate in a market that has:

a relatively inelastic demand for space

Prior to determining the treatment of capital expenditures in the calculation of NOI, it is important to distinguish these costs from operating expenses. In contrast to operating expenses, capital expenditures:

add to the market value of the property

In contrast to rent for residential units, rent for U.S. commercial properties is typically quoted as:

an annual cost per square foot

In an analogy to the stock market, the net operating income of a property can be viewed as which of the following?

annual dividend expected to be produced by the property

Assume a retail tenant is paying a base rent of $120,000 per year (or $10,000 per month). In addition, the tenant must pay 7% of gross store sales in excess of $145,000 per month as a percentage rent. If the store produces $180,000 in gross sales in a month, what is the total rent due for the month? a. 10,000 b. 12,450 c. 11,890 d. 21,900

Assume a small office building has a total usable area of 30,000 square feet and 4,000 square feet of common area. Tenant H occupies 5,000 square feet of usable area. What is Tenant H's rentable area? a. 7,000 b. 5,667 c. 7,875 d. 7,750

In determining a property's before-tax cash flow from operations (BTCF) and net operating income (NOI), it is important to understand how each accounts for the use of financial leverage in its calculation. Which of the following statements is true in regards to how these two measures account for the use of financial leverage? a. BTCF and NOI are both levered cash flows b. BTCF is a levered cash flow, while NOI is an unlevered cash flow c. BTCF is an unlevered cash flow, while NOI is a levered cash flow d. BTCF and NOI are both unlevered cash flows

The debt coverage ratio is used to indicate how much the NOI can decline before it will not cover the debt service on the property. While DCRs can vary based on competition within a particular market, lenders usually seek a minimum DCR of: a. 0.80 b. 1.20 c. 1.40 d. 1.00

When an investment appreciates in value during the investment holding period, the appreciation is generally taxed at which of the following rates? a. ordinary tax rates b. capital gain tax rates c. portfolio income tax rates d. active income tax rates

When cash flows are classified as passive activity income, investors are subject to passive activity loss restrictions. These restrictions imply that passive income losses: a. Can be used to offset positive taxable income from other passive and active activities b. Can be used to offset positive taxable income from other passive activities c. Can be used to offset positive taxable income from other passive and portfolio activities d. Cannot be used to offset positive taxable income from any type of activity

Based on your understanding of the difference between levered and unlevered cash flows, what is an example of a levered cash flow?

before-tax cash flow

Within the framework of the bid-rent model, as rents increase with proximity to the central business district (CBD), the tendency is for development to:

build upward on lots within the CBD to allow multiple tenants

In making single-asset real estate investment decisions, the first pass often involves calculating a series of returns, ratios, and multipliers. Which of the following is often cited as a limitation associated with this type of analysis? a. they are difficult to calculate b. they are complex to understand c. they fail to incorporate cash flows beyond the first year of the analysis. d. they are rarely used by industry professionals

The internal rate of return (IRR) on a proposed investment is the discount rate that makes the net present value of the investment: a. Greater than zero b. Less than zero c. Equal to zero d. Greater than the opportunity cost of not investing

In calculating the net operating income (NOI) of a property, the "above-line" treatment of capital expenditures implies:

capital expenditures are included in the calculation of NOI

Helpful in assessing the risk of lending to investors for particular projects, which of the following calculations measures the income-producing ability of the property to meet operating and financial obligations? a. Profitability ratios b. Income multipliers c. Income tax multipliers d. Financial risk ratios

In office property types, rents are quoted on the basis of which of the following? a. Usable area b. Gross floor area c. Gross leasable area d. Rentable area

The effective rent calculation is a common measure used to compare the true cost of one lease to another. While there are a number of limitations to this methodology, the effective rent calculation captures: a. interlease risk b. re-leasing costs c. the advantages associated with lease flexibility d. the time value of money

Since most real estate assets are depreciable, using accounting income to measure a REIT's cash flow may actually understate the funds that are available to distribute to investors as dividends. Therefore, REITs utilize a measure that adds back depreciation and amortization expenses, more commonly referred to as:

funds from operations

graduated rent

Net present value (NPV) is interpreted using the following decision rule: The investor will purchase the property as long as the NPV is:

greater than zero

The lease is a contract between the owner and the tenant that transfers exclusive use and possession of the space to the tenant in return for rent of other consideration. in this arrangement, the owner is referred to as the

lessor

One measure of the importance of a publicly traded asset class in the U.S. economy can be calculated by multiplying the number of publicly traded shares by the current market price of the stock. The result of this calculation is more commonly referred to as:

market capitalization

The syndication agreement generally creates a principal/agent relationship in which the syndicator (agent) is empowered to act on behalf of the investors (principals). In most principal/agent relationships, there is the concern that the agent will act in the agent's best interest, not in the best interests of the principal. This issue is more commonly referred to as:

moral hazard

Which of the following measures, equal to the estimated total market value of a REITs underlying assets, allows investors to compare the value of a publicly traded security to the value of the properties that it holds in the private market?

net asset value

When investing in commercial real estate through an intermediary, it is important to consider whether the fund has a finite or infinite life. By having a finite life, the fund manager is forced to eventually dispose of the assets and return the investors' capital. With which of the following fund structures do you expect the issues associated with finite life to be least prevalent?

open-end commingled real estate fund

Real estate private equity funds can focus investment on anything from "Class A" real estate to redevelopment in the urban center. On the risk-return spectrum, which of the following private equity fund categories tends to have a heavier development component and often involves investment in riskier property types and locations?

opportunistic

Commercial real estate returns are determined in no small part by how well the ongoing management function is performed. management decisions can be classified into two categories: property management and asset management. what functions would be considered a primary responsibility of an asset manager?

property acquisitions and dispositions

A lease option is a clause that grants an option holder the right, but not the obligation, to renew the lease, cancel the agreement, relocate within a property, or even expand to adjacent space. The existence of these options in a leasing agreement:

reduces the expected present value of lease cash flows to the owner

A tenant who expects her business to grow may wish to have a clause included in her lease that grants her the choice to lease adjacent space as soon as it becomes available. This lease option is more commonly referred to as a:

right of first refusal

When securing a new tenant for a commercial rental property, the owner of the property might incur an additional expense that amounts to the cost of refurbishing the rental space to meet the needs of the tenant's business. The allocation of money for this added expense is more commonly referred to as a(n):

tenant improvement allowance

the time value of money

Unlike many publicly traded stock and bond investments, commercial real estate investments:

yield returns generated mostly from the asset's net operating income, rather than price appreciation.

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Real Estate Final, Chapter 5, Chapter 6, Chapter 7, Chapter 19, Chapter 21, Chapter 22, Chapter 17, Chapter 18, RE 350 - Chapter 1, RE 350 - Chapter 4, RE 350 - Chapter 9

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